Finance_Deal Structuring & Financing Acquisitions

8/10/2019 Finance_Deal Structuring & Financing Acquisitions

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Deal Structuring & Financing Acquisitions

Private & Confidential

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Deal Structuring is of paramount importance

REGULATORYCONSIDERATIONS

TAX CONSIDERATIONS

ACCOUNTINGCONSIDERATIONS

FINANCINGCONSIDERATIONS

DEAL TIMING

Open offer requirements, ownership norms, capitalizationnorms

Capital gains impact to sellers, stamp duty and sales taxissues, availability of past tax losses

Ability to consolidate, goodwill impact, provisioning in thebalance sheet, purchase consideration break-up betweenassets

Cost of capital, availability of funds on target vs. acquirerbalance sheet, tax benefit for interest expense, Cross-border jurisdictions

Implementation time to financial closure


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Commonly Used Deal Structures

P


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Transaction Structures | Stock Purchase

TargetShareholders

TargetCorp.

TargetAssets

Benefits

Target StockAcquirer

Cash

Some Potential Issues Recent Examples

Simple and quick to May lead to tender offer Vodafones acquisition of

execute requirements the equity from Essar in its Minimal transaction costs Potential capital gains telecom business Pricing benchmarks are Implication for the seller Mahindras acquisition of

easier to establish Inability to cherry pick select Shares in Satyam Computersassets of the business Emamis acquisition of

shares in Zandu


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Transaction Structures | Asset Purchase

TargetShareholders

TargetCorp.

TargetAssets

AcquirerShareholders

Cash Acquirer

Corp.Target Assets

Benefits

Fairly quick to execute Ability to cherry pick assets

(or a specific business) No tender offer requirements Could be slump sale or

Piecemeal transaction ofassets

Some Potential Issues

Potential implications of stampduty and sales tax

Cash inflow into the companyand not to the shareholders

Recent Examples

Schneiders purchase ofthe cabling business of

Smartlink Indo Asian Fusegear -

Legrand Abbotts purchase of

Domestic Formulationsbusiness of Piramals

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Transaction Structures | Mergers

Acquiring

companysshareholders

Acquiringcompany XYZ

Target

(merged)companys

shareholders

Cash and/or other ABCconsideration stock

AssetsTarget

(merged)company ABC

(dissolved)Cash and/or other

consideration

Benefits

Ability to consolidateoperations into a single entity Ideal in situations like JVs

wherein existing shareholderswish to continue

Variants include reversemergers and demergers

Some Potential Issues

Time consuming - needscourt approvals Needs approval of lenders

and majority shareholders

Recent Examples

Centurion Bank of Punjabwith HDFC Bank Bank of Rajasthan with

ICICI Bank



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Financing Acquisitions

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Some Key Considerations

Sources of Financing

Forms of Financing

Cost of Financing



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Sources of Financing

Sources of Finance

Buyer SellerCommercial Finance Long term

Banks Companies Finance

InsuranceCompanies

Venture LeveragedCapital Firms Buyout Funds

PensionFunds



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Financing Considerations Differ

!The buyer / management team provide the most critical portion of

the transaction

Management/

Buyer

Seller of Target

Company

!The amount of principal a buyer invests often dictates

!The capital structure of the transaction

!The terms of the transaction!The types of lenders that will participate

!Seller may finance part of the transaction if the seller receives a

premium over an all cash price

!Seller may be willing to take back long term, subordinated debt andoccasionally preferred stock

!Earn-out arrangements are also used for compensation

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Financing Forms | Characteristics

DEBT EQUITY

CHARACTERISTICS SENIOR SUBORDINATED PREFERRED COMMON

Tax-deductible finance costs X X

Covenants/ Restrictions X X

Convertibility features X (In specific cases) X

Dilution of Ownership X (In specific cases) X X

No required fixed payments X

Base for leverage X X

Not subject to redemption X

Cost of financing Low Higher Higher Highest

EPS dilution of shares X (In specific cases) X X



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Financing Forms | Other Financial Instruments

Debt with Warrants

Junk Bonds

Paid-in-Kind Debt

Paid-in-kindSecurities

!Debt securities with attached or detachable equity warrants

!Gives the debt holder participation in the future performance of the company

!High-yield, high risk securities

!General obligation bonds that have credit ratings below investment grade

!Debt securities with interest and /or principal payable in cash or securities of

the issuer at the issuer's option

!Preferred Stock which pays dividends in cash and /or additional shares of

preferred stock at the issuer's option



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Financing Forms | Other Financial Instruments

Adjustable RatePreferred Stock

Debt securities with

put option

Alphabet / TrackingStock

Sale-lease backfinancing

!Preferred stock with interest rates that are reset at periodic auctions

!Investors retain put option

!Investors hold a company's stock but the shares participate only in the

earnings of a specified subsidiary or group of assets

!Similar to Senior Debt

!Complicated as to who receives the risk/benefit of the residual value



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Acquisition Finance (Debt) |Structuring

FACTORS DRIVING ACQUISITION FINANCE

!Companys Perspective!Minimum equity contribution

!Appropriate leveraging through an optimal funding

structure balancing cost and risk

!Limited recourse to parent for repayment - Ring

fencing liability associated with acquisition

STRUCTURING REQUIREMENT

Lender s Perspective!Adequate security with commensurate

return

!Protection against default

!Promoter comfort and contribution

!Myriad transaction specific structuring options available

!Different contemporary financial instruments for funding the acquisition including debt, mezzanine and equity

!Indian and offshore laws and regulations relating to acquisition, tax and investment

BROAD STRUCTURING OPTIONS

Target Vs. Acquirer (Leveraged Vs. Own Balance Sheet)

Recourse Vs. Non-Recourse

Off-shore Vs. On-shore SPV



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Acquisition Finance (Debt) | Challenges

Objective Issues / Challenges

Optimizing Cost

Structuring the

Transaction most

appropriately

Finding the most

suitable Lender

Timely completion

of the Transaction /

Synchronize the

entire process

To minimize the Financing cost

To minimize Transactions Costs like DD cost, Legal cost etc.

To minimize Future Costs like Prepayment penalty, Commitment charges, Penal interest etc.

To finalize the best suitable Financing instrument and provide the most appropriate Security

To choose the best suitable Jurisdiction and most optimal Borrowing Vehicle

To negotiate the Financial Covenants / other Restrictive covenants

To structure the Repayment schedule as per the Cash flow

To minimize the various kind of Tax (Withholding, Dividend Distribution, Income Tax etc.)

To decide the most suitable Lender from a long-term perspective

Whether to go for a Bilateral loan or Syndicated loan

To complete the Transaction in a Short Time especially when there are multiple bidders for

the Target

To coordinate across different geographies, lenders and various advisors



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Case Study - Acquisition Finance for L.T. Overseas Ltd. (1/2)

Business Acquisition

USD 20 MN

L T Overseas Ltd. Kusha, INC. Strategic Opportunity

One of the largest The largest basmati rice Kusha has provided the marketing

basmati rice players in marketing and distribution and distribution platform for LT

India with a topline of company in the US, with

~USD 120 MN revenue of ~ USD 40 MN

Owner of Dawaat and Has portfolio of strong brands,

Heritage brands Royal and Pari, with 40%

market share in the US

basmati rice industry

Overseas brands

With its milling and product

development capabilities, LT

Overseas will be able to launch high

value add products in the US market

LT Overseas became the largest

basmati player in the US



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Case Study - Acquisition Finance for L.T. Overseas Ltd. (2/2)

DEBT TO OFFSHORE SPV WITH RECOURSE

Lending Bank Rupee !The Lending Bank, through its offshore operations,India Operations

Corporate

Loan ofRs. 80million

Acquirer

ONSHOR

OFFHORE

Equity Investment

extended US$ 13 million financial assistance to

facilitate acquisition of the Target

! Extended additional US$ 2 million to the Indian

operations through its Indian Balance Sheet

! Loan extended infused as Equity in the US SPVGuarantee

Lending Bank - Senior DebtOffshore Branch US$ 13

Million

Cash flowavailable for

Acquirer to beutilized for

debt servicing

US$ 2 million

Acquirer SPV

USA

AcquisitionConsideration for 100%

stake

Target

USA

!Security

! Pledge of SPV and Targets shares

! Corporate Guarantee of the Indian Parent

! Pledge of Promoters shareholders in the Indian

Parent company

! Mortgage of Target company brands

!Repayment

! Cash flow accrued at the Target level

! Undertaking to capitalize the USA operations, if

required

!Time taken to conclude the financing: 2 months



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Contact Details

Corporate Executive DirectorEmail: [email protected]

Lloyd Bancaire Worldwide.

nited States Luxembourg Hong Kong United Kingdom Singapore

www.lloydbancaire.com


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Finance_Deal Structuring & Financing Acquisitions